GSS Energy - Maiden Dividend Policy Due To Positive Outlook

GSS Energy has adopted a maiden dividend policy of at least 20% of PATMI for FY18F-19F. We think that this is a positive signal and a strong vote of confidence by the management on the positive outlook of the company.

We understand that its precision engineering business is robust and may likely enjoy 15-20% growth this year, with orders from existing customers like Philips and Lego growing y-o-y. In addition, we expect it to produce and sell oil by 1H18.

As a result, we remain upbeat on our outlook for the company, and keep our BUY call and SGD0.25 SOP-based Target Price (46% upside).

Strong vote of confidence.

GSS Energy (GSS) has adopted a dividend policy of at least 20% of PATMI for FY18F-19F. We believe that management is keen to reward shareholders by implementing this policy. This is also a positive sign and strong vote of confidence from management in its outlook, as its precision engineering (PE) business is enjoying healthy growth while it may potentially start selling oil in 1H18.

We expect 20% of PATMI to be equivalent to a potential dividend yield of 1.9% for 2018, before it gradually increases to 2.4% in 2019F.

PE business is enjoying robust growth from existing and new customers.

Management revealed that demand from its existing customers like Phillips and Lego has stayed strong, with orders growing 20% y-o-y this quarter.

GSS Energy has also been engaged in ongoing testing with a new customer in the consumer space, and expects to start full-scale production by 1H18 (this could boost the PE division’s topline by 15-20% in FY18). However, we understand that it would eke a narrower margin from making the respective product.

All in all, we expect the outlook for its precision engineering arm remain positive in FY18.

Only Singapore-listed manufacturer for Lego.

We understand that it is very hard to qualify as a manufacturer for Lego. In fact, GSS Energy is one in a small handful of companies that manufacture for Lego – especially in Singapore. This is a testament to the technical capability and quality of its PE arm.

We expect margins to also be better than that of its usual orders.

Revenue from oil & gas business to come.

On 13 Dec 2017, GSS Energy made a hydrocarbon discovery in its Trembul Operating Area. Management has stated that it expects production of gas to commence in 4Q18.

GSS Energy is re-entering a makeover well and we expect it to start producing 200 bbls of oil a day by 1H18 – and to enjoy better margins and profitability if oil prices continue to increase.

Significantly undervalued.

With a positive outlook ahead, we think GSS Energy is currently at an inflection point. At its current share price level, the stock is significantly undervalued. It also provides a unique opportunity for investors to ride on the manufacturing boom and oil price recovery. As a result, we maintain our BUY call, with an unchanged SOP-based Target Price of SGD0.25.

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